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Understanding Real-World Assets (RWAs)

By Laxmikant Khanvilkar

Tokenization of real-world assets (RWAs) enjoys the biggest prospects in the blockchain space, with a potential market size of hundreds of trillions of dollars. Theoretically, one can tokenize and add anything valuable to a blockchain.

Because of this, the market for tokenized RWAs in the digital asset space is expanding, and more and more projects are aiming to tokenize a wide range of assets, such as money, commodities, real estate, and much more.

Let us try to understand the intriguing world of tokenized RWAs, their creation process, and why Chainlink is the only platform capable of offering a complete answer for meeting tokenized asset criteria.

So, to begin with, let’s know what real-world assets (RWAs) are.

Real-world assets (RWAs) are digital tokens based on blockchain technology. They replicate conventional and tangible financial assets like cash, commodities, stocks, bonds, credit, artwork, and intellectual property in digital form. As a result, the ability to access, trade, and manage RWAs has changed significantly with their tokenization. This has opened up new possibilities for blockchain-powered financial services as well as a broad range of non-financial use cases supported by decentralized consensus and cryptography.

The most exciting application of blockchain technology is asset tokenization, which has a market potential that almost fully encompasses all human economic activity. The financial industry will likely see hundreds of blockchains supporting trillions of dollars’ worth of tokenized RWAs on a common substrate made up of distributed ledger technology-based networks and blockchains linked by a universal interoperability standard. The direction of the future of finance is clear.

Tokenizing Real-World Assets

Representing an asset’s ownership rights as an onchain token is the process of tokenizing real-world assets. By creating a digital representation of the underlying asset, this procedure helps to close the gap between physical and digital assets and permits on-chain administration of the asset’s ownership rights.

Compared to traditional assets, tokenized assets have more liquidity, more accessibility, transparent on-chain management, and less transactional friction. Tokenizing RWAs for financial assets also creates a single layer that handles distribution, trading, clearing, settlement, and safekeeping, making it possible to create a more efficient on-chain financial system with lower counterparty risk and more effective capital mobilization.

How to Tokenize Real-World Assets

Tokenizing a real-world asset is a multi-step procedure at a high level.

Selecting the actual asset to be tokenized in the real world.

Token specifications define the type of token (fungible or non-fungible), the token standard to use (such as ERC20 or ERC721), and other crucial details of the token.

Selecting the public or private blockchain network to issue the tokens. By integrating the Chainlink Cross-Chain Interoperability Protocol (CCIP), you can access the tokenized RWA on any blockchain.

High-quality offchain data from reputable and trustworthy Chainlink oracles is necessary for the majority of tokenized assets. Ensuring user transparency requires using a verification service, like the industry standard Chainlink Proof of Reserve (PoR), to confirm the assets supporting the RWA tokens.

Minting the tokens, distributing them, and implementing the smart contracts on the selected network.

Real-World Assets in DeFi

Tokenized RWAs could drastically alter the world of decentralized finance. DeFi acted as a kind of proof-of-concept for onchain finance, which is a better technical layer that facilitates commercial and financial activities. Nonetheless, the vast majority of assets are not part of the blockchain ecosystem, even though they might still profit from the advantages of the technology. Tokenized RWAs are essential for propelling the digital asset market forward at an exponential rate, as they enable the majority of assets not currently part of the blockchain ecosystem to utilize blockchain rails.

Blockchain-enabled assets that are currently not part of the digital asset ecosystem will improve the financial system. This will result in increased transparency, lower systemic risks, and a more equitable environment where a small number of people cannot take advantage of the system for their own gain.

According to DefiLlama, tokenized real-world assets (RWAs) represent a rising portion of the DeFi ecosystem, with a total value locked at about $5 billion by December 2023.

Real-world assets can also enable the creation of new financial products. For instance, MakerDAO, one of the biggest DeFi protocols in terms of total value locked, collateralizes the stablecoin DAI with a range of real-world assets, demonstrating a creative approach to generating new financial assets utilizing both conventional and blockchain-based assets and technology.

Benefits of Real-World Asset Tokenization

Tokenized real-world assets offer numerous benefits, including:

Liquidity: 

Tokenized RWAs provide enhanced market liquidity for formerly illiquid assets by establishing globally accessible liquidity conditions on a single substrate—the blockchain ecosystem with cross-chain activity facilitated by Chainlink CCIP.

Transparency: 

The on-chain representation of tokenized assets ensures transparency and auditable asset management, thereby reducing systemic risks by simplifying the assessment of the system’s overall leverage and risk.

Accessibility: 

By providing simpler access through blockchain-based applications and enabling a wider range of users to utilize assets that would otherwise be unavailable to them through fractional ownership, tokenized RWAs can increase the potential user base of specific asset categories.

Navigating the Risks of RWA Tokenization

Tokenized RWAs carry some risk, mostly due to the reliable custody of physical assets and the external connection. Furthermore, smart contract vulnerabilities and faults are possible. Lastly, for an asset to succeed, there needs to be strong market liquidity or demand for it in addition to just issuing it.

Role of Chainlink Platforms in Tokenized RWAs

Financial institutions and capital markets demand a high level of security, and Chainlink is the only fully featured platform that can meet all these requirements for tokenized real-world assets. The decentralized computer network Chainlink has facilitated transactions worth billions of dollars.

Three essential skills are needed by tokenized RWAs in order to fully profit from on-chain financing. They should possess the following three essential skills.

• Be enriched with knowledge from the actual world.
• Be safely moved across chains.
• No matter which chain they are moved to, connect to off-chain data.

Chainlink services are the industry standard for augmenting RWAs with off-chain data, having brought billions of data points onto the chain. Among these services are the following:

Proof of Reserve: 

Autonomous, dependable, and fast verifications enable users, asset issuers, and onchain apps to monitor the cross-chain or offchain reserves supporting tokenized RWAs. This gives them more transparency and makes it possible to install circuit breakers, which safeguard users in the event that the value of offchain assets deviates from tokenized onchain assets.

Identity: 

In order to facilitate transactions between asset managers, banks, and their clients, secure on-chain identity systems must be established. DECO is a privacy-preserving oracle system under development that makes use of zero-knowledge technology to allow organizations and people to validate the ownership and provenance of tokenized RWAs without revealing personal information to third parties.

Data Streams and Data Feeds: 

Users can provide a safe, decentralized source of financial market data about indices, commodities, stocks, currencies, commodities, business financials, and more to support on-chain markets.

Functions: 

Examples of offchain events and data that can sync or publish onchain include standing settlement instructions, corporate actions, proxy voting, ESG data, dividends and interest, and NAV.

Once real-world data enhances the tokenized RWAs, they need to transfer between blockchains while retaining their current price, identity, and reserve value information. For a wide range of public and private blockchains, a secure solution that provides both off-chain and cross-chain connections is therefore required. This issue is resolved by Chainlink, a platform that offers complementary services, including cross-chain and off-chain data communication, while upholding the strict security standards demanded by financial markets and institutions.

For a range of blockchain and tokenization use cases, some of the biggest banks and financial market infrastructures in the world are investigating the possibilities of the Chainlink platform:

In order to demonstrate a safe and scalable method of connecting different blockchains using Chainlink CCIP, Swift, the standard messaging network connecting more than 11,000 banks, worked with Chainlink and over ten major financial institutions, including Euroclear, Clearstream, BNP Paribas, BNY Mellon, and Citi.

To bring capital markets on chain, DTCC, the largest securities settlement system in the world, is collaborating with Chainlink. It handles more than $2 quadrillion in transactions annually.

A prominent Australian bank with $1 trillion or more in assets under management, ANZ Bank used Chainlink CCIP to illustrate a cross-currency, cross-chain acquisition of tokenized assets.

Hong Kong-based financial institution ARTA TechFin is using Chainlink’s decentralized computing technology to enable essential functions for its tokenized funds.

In the Web3 ecosystem, Chainlink is the top platform for tokenized RWAs, enabling initiatives like Backed, Brickken, Matrixport, Poundtoken, and TUSD.

The tokenization of real-world assets enables the re-platforming of finance into a more safe, transparent, and effective backend infrastructure stack, while also addressing significant risk management and conflicts of interest issues associated with traditional financial infrastructure. The Chainlink platform, which offers the safe, dependable, and effective services required to unlock the future of assets, is the foundation supporting this change.

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